Debt generally allows people and organizations to do things that they otherwise wouldn't be able or allowed to. Typically, people in industrialized nations use debt to purchase houses, cars and many other things too expensive to buy with cash on hand. Businesses also use debt in many ways to leverage the investment made in their private equity.
The leveraging of the borrower's finances (i.e., the proportion of debt to equity) is considered important in determining the level of risk associated with an investment; the more debt per equity, the riskier the transaction in terms of probability of repayment. Debt is generally regarded as a sign of optimism and that a society believes in its future (especially earnings).
In general, financial lending services are an established and integral part of our economy. The lending industry has many different segments with several product offerings that are serviced by numerous types of entities, which may comprise intermediaries (e.g., ‘middle men’). Examples of representative segments include consumer lending and business lending, as well as others. Lending markets further consist of sub-segments including prime and sub-prime lending. Product offerings within the consumer segment, for example, include home, auto, home equity, credit cards, etc. Representative product offerings within the business segment include lines of credit, equipment loans, building loans, and the like. Representative entities that lend capital include banks, savings and loans, finance companies, as well as others.
In general, the majority of conventional lending has involved the process representatively illustrated in FIG. 1. The process typically includes multiple individuals and entities (100a, 100b, 100c, 100d) with various risk profiles needing financing. The process may include multiple lending entities 120 openly competing to attract multiple independent borrowers (100a, 100b, 100c, 100d). Lenders 120 may use portfolio diversification to reduce risk and maximize profits. Lenders 120 have previously employed portfolio diversification to their advantage because they have the power to structure the portfolios. They acquired customers, diversify risk and extracted a risk premium for their efforts. Lenders 120 have also charged interest aimed at covering cost of capital, cost to acquire customers, cost to cover defaults, operating costs, as well as a target rate of return. As part of the cost to acquire customers, some lenders 120 aggregate volume through brokers 110 (e.g., as in the case of mortgage brokers), thereby further increasing costs. This conventional workflow discourages additional non-traditional lending sources, such as pension funds, corporations with excessive cash on-hand, or governments, for example, from more directly entering the lending marketplace in order to earn more than money market rates. Money market rates are those low rates offered by banks and others for merely holding cash. The conventional loan process concludes with borrowers receiving funds (130a, 130b, 130c, 130d) and repaying lenders (140a, 140b, 140c, 140d). Alternatively, borrowers in default (150a, 150b, 150c, 150d) may enter collections 160 if they are unable to continue payments under the program.
Conventional lending processes may be efficient for individuals and entities that have access to financing; however, highly leveraged individuals and entities, and those with less than perfect credit ratings, generally pay substantial interest penalties from this process and may have fewer available financing options. Conventional lending programs generally operate to prevent individual borrowers from directly participating in cost savings typically associated with diversification or the leveraging of terms to negotiate lower fees. Accordingly, the conventional lending art is inefficient for borrowers, since it generally prevents them from obtaining institutional knowledge to leverage volume in negotiations with suppliers. Moreover, the conventional lending art also inhibits lowering borrower costs through risk diversification.
In addition, the current lending process is inefficient because it is highly fragmented. There are many entities such as banks, savings and loans and finance companies. There are also many brokers or intermediaries that initiate and aggregate loans. All of these entities must support their independent operations. These costs, in turn, contribute to excessive lending fees.
In addition, the large number of lenders or intermediaries in the marketplace has forced many lenders to practice predatory lending in order to meet financial growth forecasts. For example, many credit card companies have promotional practices that offer low up front interest rates in order to attract customers. Once they have the customers, they monitor their customer's credit reports to detect any changes in risk profile. If a change is detected, sometimes even minor, they usually raise the interest rate of the customer to as high of a rate as allowable by law. As another example, Lenders routinely charge a varying number of fees aimed at improving profitability and not improving the process. Examples of these types of fees include late payments and over credit line fees.